Business Matters: Unmask Equipment’s True Value

August 5, 2014 09:05 PM
 
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If there is one thing the past couple of years have taught us, it’s we can plant our crops with amazing speed and efficiency. What used to take many producers 15 to 20 days to accomplish can now be done in five to seven days. 

It’s obvious speed and efficiency are critical at planting. In fact, it’s easy to make the argument that every mechanical operation requires a similar level of performance. But being as efficient as possible comes with several layers of expenses you should clearly understand when calculating the costs that come with your farm equipment. 

I’m not necessarily advocating cutting back on equipment costs. Instead, I’m encouraging all producers to take a much closer look at their equipment costs, usage and efficiency.  

In working with producers during the past 10 to 15 years, I’ve observed huge variation in investments. Some minimize equipment investments and still maximize productivity, while others have had to increase equipment investments to achieve higher levels of productivity. For almost every producer, though, one fact remains: Equipment is generally the second largest line-item expense next to land.  

During the past five years, machinery and equipment costs have gone up almost 60%; at the same time, most grain producers achieved record returns. Therefore, producers might not fully realize how equipment affects an operation’s cost structure on various levels.

For example, many producers prioritized needed updates by investing in equipment, increasing per-acre costs assuming the same acre base. Cost per bushel might also have increased. Suppose a producer with $1 million in equipment five years ago now has an investment of $1.6 million. If the producer’s acreage remains consistent, it’s feasible the cost per bushel has increased up to 30¢. 

Again, I’m not saying cost increases are necessarily bad. They must be understood. For example, the additional $600,000 in equipment investments could produce an extra $60 per acre in value because of timeliness, quality, accuracy and overall increased yields. The trick is to determine the difference between cost and value.

Proceed With Caution. Calculating equipment costs can be time-consuming, complicated and frustrating at first. As a result, many producers have a tendency to rely on university averages. Although these numbers accurately reflect the costs of producers whom the university surveyed, it’s unlikely your costs are the same—in fact, they probably differ significantly. It’s understandable for producers to use equipment cost averages as a guide or for informational purposes. But using survey prices is like using other producers’ yield-map averages instead of your own. 

Even though calculating your own costs might be somewhat painful, it’s a process that can pay huge dividends. As I work with producers who do custom work, for example, I often discover their equipment and labor costs are higher than what they charge. 

Too often, there are several basic expenses overlooked with regard to machinery and equipment. Normally, fuel and equipment payments are considered, but the scope of review must be expanded for the sake of accurate assessment. Among the cost categories that absolutely must be included as part of any thorough review are labor, repairs, interest, depreciation, GPS subscriptions, opportunity cost and logistical expenses.


In the next couple of columns, I’ll provide more details about how to calculate your costs per individual pass, per acre and per bushel.


Chris Barron is director of operations and president of Carson and Barron Farms Inc. in Rowley, Iowa. He is also a farm business consultant and appears regularly as a guest on Farm Journal Media radio and TV affiliates. To submit questions and comments, email cbarron@cb-farms.com.
 

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